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Canada's Dollar Strengthens for First Week in a Month as U.S. Adds Jobs
Canada’s currency strengthened for the first week in a month versus the greenback after a report showed U.S. employers added more private jobs than economists forecast, boosting stocks and brightening the outlook for trade between the two nations.
The loonie, as the currency is known for the aquatic bird on the dollar coin, appreciated 1.1 percent this week and yesterday outperformed all 16 of its most-traded counterparts amid renewed demand for growth-linked currencies. The jobs report added to arguments Bank of Canada policy makers should raise interest rates when they meet on Sept. 8.
“It was all about the job numbers,” Bob Block, director of foreign-exchange sales at Bank of Montreal, said by phone from Toronto, explaining why the loonie rose. “The Bank of Canada stated one of its concerns was the pace of economic recovery in the U.S. With their decision coming next week, and this being the last piece of major data before then, this may address some of those concerns.”
Canada’s currency rose to C$1.0382 yesterday in Toronto from C$1.0508 on Aug. 27. It touched C$1.0381 after the report, the highest in two weeks. One Canadian dollar buys 96.32 U.S. cents.
The MSCI World Index, a gauge of equities in 24 developed nations, gained 1.1 percent yesterday and 3.9 percent for week. The Standard & Poor’s/TSX Composite Index rose 0.3 percent yesterday and 2.2 percent for the week.
Stock Reaction
“The directional bias to sell the U.S. dollar against the Canadian dollar has been a function of the equity rebound,” Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, said via instant message. He predicted Bank of Canada Governor Mark Carney “hikes and accompanies it with dovish guidance” on Sept. 8.
Private U.S. payrolls that exclude government jobs rose 67,000, after a revised 107,000 increase in July that was more than initially estimated, Labor Department figures showed. The median estimate of economists surveyed by Bloomberg News called for a gain of 40,000. Overall employment fell 54,000, versus a forecast drop of 105,000.
“The job losses weren’t as severe as expected,” Bank of Montreal’s Block said. “The Canadian dollar got its boost from the broader risk appetite that returned.”
The yield on December 2010 bankers’ acceptances, the most- active contract, jumped eight basis points to 1.21 percent yesterday, the highest since Aug. 19. The yield is a barometer of short-term rate expectations.
Tight Times
“The Bank of Canada will tighten next week on the grounds that despite slowing overall growth, domestic demand in Canada has remained quite resilient,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit, said via instant message. “The economy can certainly deal with a 1 percent overnight rate at the moment, regardless of the international context.”
Government bonds slumped yesterday, sending the yield on benchmark two-year bonds up 10 basis points, or 0.10 percentage point, to 1.38 percent, an increase of 8 basis points during five days. The price of the 2 percent security due September 2012 dropped 17 cents during the week to C$101.21.
Canada’s benchmark two-year yields reached an 18-month high of 2.07 percent in April, before the European debt crisis kicked off concern the global economic recovery was floundering, sending investors scrambling for safety. The yield slumped to as low as 1.16 percent on Aug. 24.
Directional Change
The loonie was headed for a weekly decline versus the greenback before the employment report yesterday. It touched C$1.0673 on Aug. 31, the lowest since July 6, after Statistics Canada said the economy grew at an annualized 2 percent in the second quarter, down from a 5.8 percent rate in the first quarter and lower than all 18 estimates in a Bloomberg survey.
“The perception and the reality is that the Canadian economy is very dependent on the U.S.,” said Bank of Montreal’s Block. He said chances of an interest-rate increase this month are about 65 percent, based on trading in interest-rate derivatives.
The Bank of Canada raised the benchmark rate by 0.25 percentage point at the central bank’s June 1 meeting and again on July 20, bringing it to 0.75 percent. Carney said further action will be “weighed carefully against domestic and global economic developments.”
To contact the reporters on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
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